January 8, 2020

How Much Money Do You Have to Put Down on a House?

Short answer: It depends on the type of mortgage you use.

Different loan programs require varying amounts. Down payments are expressed in percentages of a home's purchase price. The amounts range from 3% to 20% of the home's price.

For example, say you're buying a $200,000 house. If you put 10% down, you would need to have $20,000. A 20% payment on that same house would be $40,000.

The amount of money you should put down when purchasing a home is 20% of the home's total purchase price. If you hit this 20% threshold, you avoid having to pay an additional fee, called private mortgage insurance (PMI). It's tacked onto your monthly mortgage payments and can be burdensome to pay off.

When it is time to finally purchase your dream home, start with your budget and down payment amount. Try to meet or exceed the 20% down payment requirement. If you do, your house hunt will probably go smoother.

As a first-time home buyer, these numbers can be intimidating. Saving $40,000 isn't quickly attainable for many people. While it isn't mandatory to put 20% as a down payment on your home, it can help you avoid costly PMI.

What percentage do you need to put down on a house?

Your down payment plays a vital role in the home buying process, and it needs to be available before you close on your home loan. Before you can determine how much money you need to begin saving for your down payment, the below factors will help you consider how much money you'll need:
  • Loan types: The loan you choose will determine your minimum down payment amount.
  • Private mortgage insurance (PMI) requirements: Depending on the loan, you need to purchase PMI if you pay less than 20% of your home's value. PMI can account for 0.2% to 1.50% of the original loan amount each year. These PMI rates, combined with your down payment and total loan amount, could add hundreds of dollars extra per month.
  • Interest rate: The size of your down payment can positively or negatively affect your mortgage loan interest rate. A down payment represents your investment in a home, and a lender will often lower rates for higher down payment amounts.
  • Monthly mortgage payment: The more money you put for a down payment for a house, the lower your principal monthly mortgage will be.

Your loan type will affect your down payment amount

Every home purchase is different. From the size of down payment to the type of loan, there is not a single "best way" to purchase a home. From experience, we can tell you that the best homeownership begins with finding a home your love within a price you can afford.

While a sizable down payment on a house will help with interest and monthly mortgage payments, for some, meeting that a 20% down payment is a hardship.

Regardless of your financial position, there is likely a loan available that will fit your parameters and help you meet your down payment and monthly mortgage goals.

These seven first-time home buyer loans and other financial products will help you get started:
  • Conventional loans
  • Fannie Mae or Freddie Mac
  • Federal Housing Administration (FHA loan)
  • Good Neighbor Next Door
  • VA loan
  • USDA Loan
  • State and local first-time home buyer program
  • Home co-investment

Conventional loan
These loans are issued by private lenders to home buyers. Conventional loans require buyers to have a minimum 20% down payment, low debt-to-income ratio, and a high credit score. Less than 20% down payment on a conventional mortgage will require you to pay for PMI.

Fannie Mae or Freddie Mac loan
These loans are suitable for someone with a good credit history and credit score. You can get a Fannie or Freddie loan if you have just a 3% down payment. While the requirements for using this loan start at 3%, you will still have to pay PMI if you do not hit the 20% threshold.

Federal Housing Administration (FHA) loan
Backed by the Federal Housing Administration with rates typically less than conventional loans, this loan is a good option for those with lower credit scores and small down payment amounts. However, these loans include additional premium fees from mortgage insurance. Those fees can add up.

VA loan
Available to U.S. military members (active duty and veterans) and backed by the United States Department of Veterans Affairs (VA), these loans come with lower interest rates and require no down payment. However, you have to pay for closing costs and a variable funding fee, which increases after each use.

State or Local funded grants
Many states or cities offer first-time home buyer down payment assistance to entice people to move into specific locations. This aid comes from grants that will help cover the cost of down payments and offer low-interest loans with deferred repayment plans. Contact a real estate agent or local housing agency in your area for more information about these first-time home buyer loans.

Home co-investment
While not a loan or assistance program, using a home co-investment option, like Unison, can get you to the 20% needed for your home down payment. In exchange for their financial investment in your home, Unison will share the appreciation (and in most cases, the depreciation) of your home when you sell it - up to 30 years later.

With Unison, there is no additional interest or monthly payments. In fact, you can actually buy them out after three years. This option offers buyers the chance to secure the 20% without having to pay for PMI. You still need to secure a loan for the rest of the home using one of the methods above, but it can help with the down payment and get you into a home faster.

How much can you afford?

The next step is to determine how much you can spend within the housing market.

Before you get attached to a beautiful new home out of your price range, assess your personal finances and determine how much house you can afford.

According to the Federal Housing Agency, you should put aside no more than 25% of your monthly income to pay for your home. If you have your eye on a specific home price range, such as $200,000 to $250,000, how much income you need to afford that range can be determined with a simple calculation.

While the overall monthly mortgage payment will vary depending on the life of the loan you choose, the interest rate, and location, this baseline is a good place to start budgeting.

Say you make $4,000 a month. Multiply that amount by 25% to determine your maximum monthly house payment of $1,000.

Based on a 30-year mortgage with a 4% fixed interest rate, here are some home and down payment options you could afford with a $4,000 per month income. (This example does not include property taxes or insurance):
  • $200,000 home with a 20% down payment:
    • Down payment: $40,000
    • Mortgage Amount: $200,000 - $40,000 = $160,000
    • Monthly mortgage: $764 per month
  • $200,000 home with a 10% down payment:
    • Down payment: $20,000
    • Mortgage Amount: $200,000 - $20,000 = $180,000
    • Monthly mortgage: $859 per month

Notice how both of these numbers are under the goal of $1,000 per month? However, remember that your down payment and loan will affect your overall price.

If you cannot afford a 20% down payment and still want to secure a conventional loan, prepare to add in PMI payments to your monthly mortgage amount.

How can I get money for a down payment on a house?

The ability to have thousands of dollars upfront for a new home can be challenging. According to Realtor.com, the largest group of first time home buyers falls between ages 29 and 38, with a median age of 34.

Many Millennials still struggle with student debt and job security. Tacking on the requirements for large sums of money for a new home may make many first-time home buyers balk at homeownership.

Luckily, there are many smart ways to secure and a down payment on a new home:
  • Ask for a gift
  • Ask the seller
  • Start saving
  • Tap into your retirement
  • Home co-investment

Ask for a gift
A rather common practice, it is not unusual to ask family members for help to buy your first home. There are tax laws in place that let home buyers receive a down payment in the form of "gift" from a family member or non-profit organization. If you do go this route, you must provide all the proper documentation and the amount needs to be within the set "gift amount" requirements.

Ask the seller
You never know what a seller is willing to do to sell their home. Some will pay closing costs, while others will help you pay part of your down payment. It never hurts to ask, but make sure to check with the lender first because there are a few hurdles to jump if you are going to take this route.

Start saving
Set up a savings account and make the same deposit at the same time every month. This can be done directly from your paycheck, so you never see the amount and it goes straight into your "home fund." For example, if you set aside just $200 every month, at the end of 12 months, you will have saved $2,400. This strategy works, even though it may take a long time.

Tap into your retirement
If you have a retirement set aside, look first to a Roth IRA or Roth 401(k). You can withdraw from these accounts without incurring penalties or additional taxes because the contributions were already taxed.

Home co-investment
Don't have 20%? No problem. At Unison, when you buy a home, we go in on the down payment with you. You contribute 10% - or sometimes as little as 5% - and we provide the rest. Unlike a loan, there's no added debt interest or monthly payments. For more information about how Unison HomeBuyer works, contact us today.